UK Taxation: A useful guide about corporate and territorial taxation system in the United Kingdom, and attractiveness for international businesses in the UK
The UK government has set out to make the UK taxation the best country in which to locate international businesses.
The UK is one of the most open economies in the world, with a skilled workforce, capital markets access, and first-class infrastructure, and the UK taxation has a very competitive corporate tax system. The Government has been conducting a thorough review of the UK taxation system since 2010. It has also collaborated with businesses to determine the direction and design for our reforms. The UK taxation has simplified and made tax policy more transparent, which makes it better suited for modern business practices and a globalized trading environment.
The UK’s corporate tax system is a great asset. It can help to improve the business environment and attract investment from multinational companies.
The UK has changed its taxation system to tax overseas profits. It is now a system that taxes worldwide profits and not just in the UK. Significant changes have been made to make the UK the preferred destination for high-tech and creative industries.
Patent Box lowers the cost of commercially exploiting intellectual properties. UK offers flexible and generous credits to offset the cost of Research & Development (R&D), as well as a new, international competitive ‘above-the-line’ R&D credit for large companies. The UK was also introducing tax reliefs to help our creative industries: the new animation and high-end TV tax reliefs will continue the success of the film tax relief.
The perceptions of the UK taxation system are changing due to the Government’s reforms. The UK has a clear strategy to reform based on principles that support a modern, transparent and efficient tax system. This provides certainty for long-term financial planning as well as investment.
The UK taxation system.
The United Kingdom Government has reformatted the corporate UK taxation system in order to attract international business to the UK. They are committed to creating the most competitive G20 tax regime. New flexible and competitive rules are in place to tax multinational profits.
This includes a modernized Controlled Foreign Company (CFC), as well as an extensive treaty system. This makes the UK a desirable location for international business hubs, regional holding companies, and headquarters.
High-tech and innovative industries can enjoy highly competitive tax breaks.
- The new ‘Patent Box” rules will allow profits from the development or exploitation of patents in the UK to be subject to a corporate tax rate of only 10%
- A competitive international ‘above-the-line’ R&D credit.
- Animation, high-end television producers, and video games get generous tax breaks
The UK taxation is an attractive destination for international investments.
The UK is the sixth-largest trading country in the world and has a long history. The Government is well aware of the importance to remain competitive and continues to emphasize the UK’s appeal for international investment. This commitment to fair and open trade is underlined. The UK has easy access to Europe through its extensive rail, road, port, and railway networks.
The UK has four of the top ten universities worldwide 2 and a skilled workforce. The country also has a top-notch business infrastructure and a legal system that is known for its ability to resolve commercial disputes.
INTERNATIONAL CONTRACTS ARE OFTEN GOVERNED BY ENGLISH LAW.
A foreign business can invest in the UK by setting up a bank account, registering a company, and then trading within a matter of hours. They also receive the same support as domestic firms from the UK Government.
The UK’s reputation for excellence in financial and business services makes it a great location for international activities. The UK consistently attracts more headquarter operations than any other European country.
THE UK IS EUROPE’S TOP DESTINATION FOR DIRECT FOREIGN INVESTMENT.
Nearly 40% of all currency exchanges worldwide take place in the UK. The UK’s financial services are not the only sector that is thriving. The UK’s car manufacturers are doing well, it has attracted significant R&D investments from many of the top life science companies in the world, and East London’s ‘Tech City’ is encouraging innovation in the high-growth sector of information technology.
THE UK IS THE GLOBAL HUB FOR TRADING NATIONS
From the American markets to Asia to the east and the west, and as a gateway into Europe. China invested in the UK through many sectors in 2012, including utilities and aviation. The London 2012 Olympic and Paralympic Games showed that the UK is proud to offer a warm welcome and the chance to compete with the best in the world in business and sport.
The UK corporate taxation system.
The UK Government aims to establish the most competitive corporate tax system in the G20. The UK Government has been reforming corporate tax policy since 2010 to achieve its policy objectives of lower taxes and a wide tax base. This policy is focused on taxing UK-generated profits.
The Government published The Corporate UK Taxation Road Map 2010 In 2010, which outlines the UK’s strategic approach towards tax reform.
To give businesses the confidence they need to invest in the UK, and to provide a consistent and clear direction for reform, the road map outlines the following principles:
- Low corporation UK taxation rate, with limited reliefs and allowances to minimize distortions
- A stable UK taxation system that avoids tax legislation changes
- Modern business practices are aligned to tax policy
- Complexity is reduced in tax legislation
- Tax administration that maintains an equal playing field for taxpayers
- Transparent and consistent policy-making approach, fully engaging taxpayers in policy development
The UK Road Map outlined our goals for reform in four areas.
- The main focus is on reducing corporate tax rates
- Territorial UK taxation system
- The Patent Box
- Improving R&D tax credit
In consultation with businesses, the Government is now fulfilling all of these policy promises. The UK has no additional taxation for the profits of companies. The UK taxation rate is among the lowest in G7 countries and will be the joint lowest in G20.
A territorial UK taxation structure.
The UK taxation has changed from a system that taxed UK companies worldwide to one that taxes profits made in the UK. This new approach has three key components: a dividend exemption, an option branch exemption, and a reformatted Controlled Foreign Company regime (CFC).
CFC rules in the UK taxation are designed to protect the country against the artificial diversion from UK profits to companies located outside the UK.
CFC rules in the UK exempt profits from controlled overseas companies from UK taxes, unless they are artificially diverted from the UK. These new rules are effective as of January 2013.
For overseas finance profits earned by a CFC through loans to foreign companies, special rules apply. The rules allow 25% of net profit to be allocated to the UK. This gives a five percent effective tax rate starting in 2015. However, there are certain exceptions. For example, if the overseas finance company was funded through rights issues of shares or if the funds used for loans were made outside the UK, then the full exemption may apply.
Multinationals who move to the UK can take advantage of a one-year exemption to allow them to do any necessary restructuring to qualify for the other exemptions.
The new UK taxation exemptio for overseas trading branches of UK businesses allows for a choice between loss relief (and taxation on profits), with double tax relief, and exclusion for profits and losses.
From July 2009, dividends were exempted completely from tax in almost all cases. The exemption, which is 100 percent, is not limited to deductions for expenses, and there is also no minimum or holding tax rate.
The UK taxation system offers generous tax rules regarding interest expense and no restrictions for funding overseas investments.
UK and International taxation.
The UK has over 100 countries covered by its network of treaties, and has pursued a long-standing policy of reducing withholding taxes on royalties and interest to zero in all its treaties. The UK is also keen to negotiate a broad range of tax information exchange agreements or provisions in full dual tax treaties.
The UK taxation system has adopted the OECD Transfer Pricing Guidelines as a guideline in its transfer pricing law.
No dividend withholding tax is applicable in the UK regardless of where the recipient is located
The UK is a member state of the EU, and its tax rules comply with all direct tax directives. These include the Parent-Subsidiary Directive, which typically exempts you from withholding tax on EU-source income dividends; the Mergers Directive and Limited Interest and Royalties Directive.
The UK has opted not to participate in the Financial Transactions Tax. Both the UK’s current and past governments have indicated that they will not be participating in the Common Consolidated Corporate Tax Base (a type of unitary taxation) currently under discussion within the EU.
UK Taxation for innovation and creativity.
The UK Government has set out to make it the European technology center by offering a wide range of incentives that are highly competitive.
Recent UK taxation reforms have created a comprehensive and competitive tax regime that supports the creation and exploitation of intellectual property (IP). The new Patent Box has favorable provisions for the commercialization of innovation and includes a comprehensive R&D credit program.
The UK government recently announced additional support for producers of animation, high-quality television, and video games.
Patent Box profits are subject to a 10% corporation tax rate as part of the Government’s goal to encourage innovation in the UK. This is a substantial saving compared to the 20 percent main tax rate (by 2015).
Businesses have an opportunity to lower the cost of commercial exploitation of IP with the new Patent Box. Global businesses should consider the UK taxation rules to be beneficial making UK a good place to invest in innovation because of its flexible and generous regime.
This relief is available for worldwide profits from inventions that have been patented by the UK Intellectual Property Office or the European Patent Office. This income qualifies for the relief because it does not include royalties or income from the sale of patents. Also, profits from products that incorporate a patent innovation are eligible.
If a company owns or licenses exclusive rights to qualifying patents, and has created or developed the patented invention or a product that incorporates it, it qualifies. This applies even if the development was done by another company or group. The firm must be responsible for the development of the patent and actively participate in its ongoing decisions. Even if it didn’t create the IP, a company can still benefit from the system. This is in line with the Patent Box’s objectives to encourage continued development and commercial exploitation by UK-based businesses of patents.
UK taxation for R&D
The UK taxation system has an internationally competitive R&D credit program that is generous and highly competitive. There are different programs that cater to both large and small- and mid-sized businesses (SMEs). Both schemes encourage companies to engage in R&D activities in the UK.
Large companies can take a tax deduction of 130 percent for qualified R&D expenses under the existing super-deduction regime. The ‘above-the-line’ credit for large companies has been added to this system.
Companies can use this credit to offset their R&D costs in their accounts, resulting in a cost reduction. ATL credit is ten percent of eligible R&D spend. It will be available to all companies without tax liability. The credit system will be available alongside the current R&D super-deduction system. Businesses can choose which scheme to claim. The ATL regime will replace the super deduction’ system in 2016.
The ATL regime gives business managers a better view of the benefits beyond the tax department. Global decision-makers should be able to see the cash benefits of R&D activities being conducted in the UK taxation system more clearly. This new ATL relief for foreign investors could help to preserve double tax relief. It will also preserve the value and potential benefits of R&D credit within the global group. Large loss-making companies can now receive cash benefits immediately to help with further R&D.
Eligible companies can claim a total deduction of 25% on qualified R&D expenses under the SME scheme. Companies that are insolvent can trade tax losses resulting from R&D relief to receive a cash credit at a rate of 11 percent.
The R&D tax credit programs allow large companies to cut qualifying R&D costs by around 8% and SME’s by about 25%, respectively.
UK film taxation relief.
Film tax relief provides a tax credit that can be applied to qualifying expenditures up to 25%. Films must be culturally British certified by passing a cultural assessment to be eligible for tax relief.
UK taxation and reliefs for the creative sector.
The Government has introduced the new UK taxation reliefs that are competitively priced for animation, high-end TV, and video game industries. These new tax reliefs are part of the Government’s ambition to make the UK the technology center of Europe. They will also be some of the most generous in the world.
These new UK taxation reliefs will be modeled on the success of the existing tax relief for the film, which supported more than 300 films with the support of over PS200m in 2011-12. These new tax credits will allow for a tax credit that can be applied to qualifying production expenses up to 25%.
All qualifying expenses incurred in the production of a program or game will be exempted for companies. Productions must be culturally British to qualify for the relief like with film tax relief.
The UK has a tax system that addresses the larger issues related to IP taxation.
This regime’s main components were implemented in 2002 to modernize the tax treatment of IP in Britain and ensure that tax relief can be obtained for almost all technology IP.
The legal system is integral to the UK’s competitiveness as a location for IP-rich companies. It provides a regulatory environment that fosters innovation and encourages enterprise. A UK-based IP-owner business can benefit from an advanced, expert legal system that is supported by a vast IP treaty network, specialist IP judges, and access to the UK Intellectual Property Office’s expertise.
UK taxation for individuals.
Income tax: The United Kingdom is a desirable location for both employers as well as incoming executives working in the field of personal taxes. Individuals are subject to the tax year beginning on 6 April. As of 6 April 2013, the following rates and exemptions are in effect: Personal allowance of PS9440 (reducing for individuals with incomes above PS100,000.) The basic rate of 20% on the first PS32.010 of taxable earnings; a higher rate of 40% on PS32.011 to PS150,000; 45 percent top rate for taxable income over PS150,000
National Insurance: Employees pay national insurance contributions (NICs). They are charged at the following rates: 12 percent on weekly income between PS149-PS797, and 2 percent for income above that limit. Employers pay NICs to their employees who earn more than PS148 per week at 13.8 percent, which includes benefits in kind. Employers’ NICs are not subject to an upper limit. Businesses and charities will be eligible to receive the new PS2,000 Employment allowance, which will lower their employer’s NICs bill, starting April 2014.
Incentive programs: There are many tax-efficient incentive schemes for employees, such as share options and stock options. Tax reliefs are also available for contributions to pension plans.
Capital gains tax: The UK capital gains tax rates and reliefs are very low. CGT is not payable by the majority of taxpayers due to the exemption for main residences and the annual exempt amount.
Statutory residence in the United Kingdom
To provide greater certainty to all, a new statutory residence test was created.
The Government introduced statutory residence testing, effective April 2013. This was created to provide greater certainty for all people, even those with complex working and living arrangements. It will assess both how many days an individual spends in the UK as well as the connections that they have to the country (e.g., employment, family, accommodation).
Non-domicile taxation in the United Kingdom
The UK taxation liability of an individual can be affected by their domicile status. Individuals who reside in the UK but are not UK citizens can choose to pay tax on the “remittance” basis. They pay income tax on income earned in the UK and capital gains taxes on gains arising from the UK. If they are brought to the UK, they only have to pay UK tax on overseas income and capital gains.
Non-domiciled individuals who have been residents for three years or more can also claim overseas workday relief. This is for up to three years. Overseas workday relief means that earnings related to overseas work duties will only be taxable if they are remitted back to the UK. Although this relief was available for many years, it was not available until April 2013.
UK Indirect Taxation
VAT in the United Kingdom
Value Added Tax (VAT) is the principal indirect tax that applies to all EU countries. The UK rate of 20% is roughly in line with the EU standard rate. It is applicable to both goods as well as services.
Some supplies are exempted from VAT (no VAT is charged on the supply but the VAT is paid on the costs of supply) while others are subject to a reduced rate of five percent. The UK has unique zero-rate supplies. This means that input VAT can be reclaimed and VAT on supply is reduced to 0 percent.
VAT is the UK taxation on consumption. Therefore, businesses that do not end consumers should not be subject to VAT. If a business supplies VAT-eligible goods, it should be able to recover the VAT.
HMRC has a mechanism in place to ensure that disagreements are resolved quickly. For cases in which agreement is not possible, there is an independent Tribunal appeals process.
Imports of goods from countries outside the European Union may be subject to customs duties. They will vary according to the nature of the goods.
Stamp taxes in the United Kingdom
Transfers of property are subject to stamp taxes, and there are three types of stamp taxes:
- Stamp duty is a flat rate of 0.5% on all instruments that transfer stock and marketable securities.
- Stamp Duty Reserve Tax (SDRT), a flat rate at 0.5% that applies to all transfers of UK shares or related securities (including options and interests) where no instrument is executed. Generally, loan stock is exempted from stamp duty and SDRT. There are also special rules for UK shares that are traded on non-UK stock exchanges.
- Stamp Duty Land Tax (SDLT), which applies to land acquisitions in the UK (both freehold or leasehold), is payable by the buyer. The rates vary and reach four percent for business properties worth more than PS500k. Residential properties have the same rates as those up to PS1m. However, land with a higher value will attract higher rates.
Intra-group reorganizations are not subject to stamp taxes.
Special industry taxes and schemes in the United Kingdom
There are many taxes that can be applied to certain industries. For more information, visit the HMRC website at www.hmrc.gov.uk to read more about the UK taxation system.
Other taxes for business in the United Kingdom
Local property taxes are known as Business Rates. These taxes are set by the central government and collected locally to pay for local services. They are based on the property’s value that is being used for business purposes. There are no local turnover or trade taxes.
The UK doesn’t have a wealth tax.
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